New guidance for judges handling insurance issues finally passes after resistance

By Nicholas Malfitano | May 23, 2018

WASHINGTON – New guidance for judges handling insurance issues finally passes after resistance

WASHINGTON – After years in the making and plenty of opposition, an influential legal group has passed a measure that will attempt to guide judges on insurance liability issues.

The American Law Institute’s Restatement of Law covering liability insurance passed Tuesday at the group’s annual meeting in Washington, D.C. During the process of drafting the restatement, the ALI’s role and motives were called into question as insurance and business defense attorneys spoke out against the project.

But ALI reporters Tom Baker, of University of Pennsylvania Law School, and Kyle Logue, of Michigan Law School, tinkered with the restatement. No one publicly opposed its passage Tuesday.

“Liability insurance is an important meeting place between tort and contract law, legal fields in which the ALI has a long tradition of involvement,” Baker said.

“Liability Insurance case law can also vary from one jurisdiction to the next. By closely examining the existing common law, we believe that the membership approved a product that will be quite valuable to the courts.”

The ALI publishes the Restatement of Torts, which serve as standards that judges can use to decide the law in applicable cases.

The insurance liability project began in 2010, but a draft version caught plenty of attention when critics claimed the ALI wasn’t restating law, it was creating it for the benefit of plaintiffs lawyers.

Disagreement reigned leading to last year's meeting, and the ALI decided to postpone the vote to rework the Restatement.

A number of motions, filed and submitted prior to this year's meeting, were discussed in thorough detail during the session on the Restatement, which raised constructive criticisms to the document. Among others, these motions concerned subjects like:

-Striking certain principles from the black-letter law of the document;

-The influence of industry custom practice and usage as it relates to the “Plain-Meaning Rule” of insurance contract interpretation with respect to ambiguity; and

-The accountability of insurers for the independent negligence of their selected defense counsel.

All were rejected through a majority vote of the ALI membership, with the exception of a motion to amend Section 46, from David B. Goodwin of Covington & Burling in San Francisco concerning “Insurance of Known Liabilities."

Goodwin’s motion aimed to remove Section 46’s Sub-Section 2A, which would have retained the “known loss” doctrine’s applicability to a liability insurer’s duty to indemnify an insured’s known liabilities, but not extend it to the insurer’s duty to defend.

It was the only pre-filed motion that passed.

Among several changes to the draft made at the ALI’s January Council Meeting was the modification of the Restatement’s “presumptive plain meaning rule” to simply the “plain meaning rule,” as it related to insurance contract interpretation. Under the original “presumptive” standard, a plaintiff could use extrinsic evidence to argue against a contractual term.

Recently, a lawmakers group hosted a discussion on the Restatement, with one participant calling part of the draft “litigation fuel.”

Other concerns included the Restatement’s Section 27, called by Hunton & Williams attorney Lorie Masters “a muddle” and one which “compares apples to oranges” in its discussion of damages for breach of the duty to make reasonable settlement decisions – through raising two different issues in assessed damages on one hand, and coverage and the law of insurability as it relates to punitive damages on the other.

Also in Section 27, insurers can be forced to pay punitive damages for reckless behavior the policyholder engaged in even if the policy excludes punitive damages, said Victor Schwartz of Shook, Hardy & Bacon.

The reporters will now prepare the Restatement’s text for publication.

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Organizations in this Story

Hunton & Williams, Llp Shook, Hardy & Bacon L.L.P. The American Law Institute

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